Red Flag 6: When a Company Has Large “Contingent” Liabilities

Companies often guarantee the debts of subsidiaries, affiliates, and even sometimes their suppliers, customers, or executives, and this guarantee has often been hidden in the footnotes to the financial statements or is sometimes not disclosed at all. Investors should make sure to check the footnote usually termed “commitments and contingencies” and should look at any guarantees as liabilities. Steer clear of companies that are less than forthcoming about the size of such potential obligations, and always assume the worst. Adelphia Communications’ collapse into bankruptcy in 2002 owed a lot to the $2.3 billion in mostly undisclosed loans the company made to subsidiaries and firms owned by the founding Rigas family. Under the agreements, the family entities were responsible for repaying the money, but Adelphia was liable if they couldn’t do so.